Leveraged loan issuance slowly decaying towards FOMC meeting

By Dale A. Norton
•
Jun 23, 2013 10:48 pm EST

Enlarge GraphLeverage loan issuance slightly weaker than last week, but much more resilient than high yield bonds.

Weekly issuance volume is a useful indicator of issuer confidence in the market as well as investor demand for loans. When issuance volumes fall, it is a sign of diminishing momentum in the market or sometimes just waiting to clear uncertainty about major economic events.
The weekly leveraged loan issuance for last week showed a slight slow down as investors started to wait on the sidelines ahead of the Federal Open Market Committee (FOMC) statement by Bernanke. While interest rates are expected to remain steady, the market will read between the lines anticipating the timing of the phasing out of the Fed bond buying program.

Volumes down, but resilient
Last week only 14 deals priced, down from 17 the week before. The total dollar amount priced was $9.5 billion, noticeably down from the almost $12 million the week prior[LINK]. Nonetheless, this was the first meaningful departure from recent issuance volumes and it was much better than the 75% drop the high yield market experienced two weeks ago[LINK].
CLO1 issuance remains strong, which has contributed to a strong demand that has supported loan prices. CLOs are pools of loans generally made of several single B rated bonds and packaged financial structure that allows redistributing the risk among different risk profiles across the full ratings spectrum. Last week, eight more CLOs priced, bringing the dollar total to $4 billion. Year to date, CLO issuance is now just shy of $40 billion split among 79 CLOs. As a point of reference, in all of 2012 a total of $54 billion priced.

In the short-term, there will be significant volatility, but leveraged loans are generally much less volatile than equities and bonds. Much of the noise in the market nowadays has to do with interest rate sensitivity and that is a very minor factor for leveraged loans. It is likely that leveraged loans will drop slightly after the FOMC meeting if the Fed announces a clear short-term timeline to phase out quantitative easing, yet this will be driven by investors fleeing the market in general – not interest rate risk.

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